Why Indexing Still Wins for Long-Term Investors and Pension Holders

Back in 2020, we wrote this piece outlining the uncomfortable truth that active fund managers find it hard to wrestle with....that most of them consistently fail to outperform 'the market'.

Fast forward to 2025, and guess what? Nothing appears to have changed.

In this piece, I'll share the following:

• Why low-cost index funds continue to outperform the majority of actively managed funds
• The latest 2024 hardcore data that confirms the long-term underperformance of most active managers
• Why much spoken-about market concentration isn’t a reason to abandon passive investing
• Common arguments against indexing, and why they don’t stack up
• How this applies to you if you're approaching retirement and looking for a smart, stress-free investment approach

If you're a successful professional in your 50s, maybe eyeing the exit door at your company, or looking for an exit from your business, you're now facing a different kind of pressure: how to make sure your hard-earned wealth works for you over the (hopefully) several decades of your retirement!

You’re not alone, and the good news is, the data keeps making the case for a simpler, smarter approach.

Let’s dive off the top ropes and explore shall we!?

Oh, as a 'big treat' I took my lads to a WWE event in Belfast at the weekend - it was such an over-the-top show that it's imprinted on my brain, so you'll have to pardon the many wrestling references here :)

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Passive Investing: Still the Champ?

Each year, S&P Global Ratings publishes a detailed report comparing actively managed funds with passive index funds.

Their 2024 findings?

More of the same: around two-thirds of active managers underperformed passive index funds in 2024.

And when you zoom out over the past 15 years, the picture becomes even clearer: about 90% of active funds underperform low-cost index funds and ETFs.

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Before we body-slam this as yet more US-centric research that doesn't apply to us, we can also look at SPIVA's research on the rest of the world.

We soon see that this isn’t just a US issue. It’s the same story across developed markets, emerging markets, bonds and small caps.

In fact, the data suggests that the under-performance in International Equity is consistently higher at 75% in 2024, and 90% in the past 3 and the past 5 years....

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Some Active Managers 'Hammer' Passive Though, Right??

Yes, some do. And that is important to acknowledge.

However, the number that do so is very small (1 in 10 over past 3, 5 and 15 years).

Plus, because a manager outperformed one year, doesn’t mean they will next year.

And that is a challenge for choosing an active fund manager approach - just because 'Active Manager A' (lets call him The Undertaker!) has beaten a Global Equity Index (Lets call them 'The Ultimate Warrior'!) for the past 5 years, it doesn't mean they will beat The Ultimate Warrior for the next 5 years.

In fact, it appears that the probability of beating it is even lower, given the rarity of consistency.

So, if you’re relying on active fund managers to deliver outperformance in your retirement years or decades, you might be betting on the wrong wrestler, even if they are called The Undertaker at the moment.

Consistency is rare. Very rare.

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The Anti-Indexing Arguments (and Why They Don’t Stack Up)

Of course, not everyone agrees.

Active managers will always argue that this time is different, and/or that the current environment is a huge opportunity for the up-side etc etc etc...

Let’s break down the two most common arguments:

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1. “Markets are too concentrated!”

In 2024, a small group of tech giants, the so-called Magnificent Seven, made up a third of the S&P 500, and drove more than half the market’s gains according to this article via Yahoo Finance.

But this sort of concentration isn’t new.

• In the 1800s, it was bank stocks.
• In the early 1900s, it was railways.
• In the late 1990s, the internet ruled.

And yet, the broader market delivered.

In fact, an amazing study I came across via MorningStar found that in the period 1926 to 2023, just 4% of all US companies in that time (26,000 of them) have accounted for nearly all of the market’s long-term outperformance.

The only way to make sure you own those winners? Own the whole market as opposed to trying to select and deselect winners and losers.

Instead of backing just one wrestler to win, put your money on them all!

You won't make a total killing (what the Active Managers are trying to do) but you won't get killed either - which is key dear reader!

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2. “Indexing is distorting price discovery!”

Another claim is that the rise of passive investing makes the market less efficient, and more bubble-prone.

That might sound reasonable at first glance, but here’s the reality:

• Even if 99% of investors were passive, the 1% active traders would still be enough to keep prices efficient.
• During and after the internet bubble (arguably the bubble of our time), most active managers still underperformed the index, even when mispricing was rife.

So yes, bubbles happen.

Here is an article from 2010 (15 years ago) which stated that indexing was distorting the market back then - and that investors would be better off allocating to Active Fund managers. The SPIVA report has shown that that was patently incorrect in c90% of all cases since!!!

Beating indexed strategies consistently as an active manager? That’s still a myth.

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What This Means for Your Retirement Strategy

If you’re planning to leave employment in the next few years, or you’ve already left and now starting to panic/worry or wonder, the research suggest you want to make sure your investments are:

• Cost-efficient
• Predictable and low maintenance
• Diversified and resilient performers

Passive, globally diversified index funds check all those boxes for the vast majority of long-term investors, pension and ARF holders etc.

They don’t try to outsmart the market, they own the market. And over the long-term, that’s exactly what has delivered the best results for real people like you.

They’re also, dare we say it, boring.

But when it comes to retirement income over the next 3 decades, boring would be just brilliant!

It's the Ultimate Warrior of strategies - or the Giant Haystacks if you are looking for a more local equivalent!

Final Thoughts: When Doing Less is Doing More

As we said back in 2020 and will say again today, most actively managed funds have failed to beat the market in the past, and will likely fail to do so in the future. That’s not opinion. That’s evidence.

Indexing gives you:

• Broad exposure
• Low costs
• Minimal stress
• Higher likelihood of success

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The best investment strategy is the one that doesn’t require you jumping into the ring every 5 minutes to get based around the place! For most, one that lets you get on with enjoying the next phase of life, without second-guessing every market wobble.

P.S. If you're planning your retirement, have accumulated 7 figures of retirement assets, and want to make sure your investment strategy is aligned with your goals, we're here to help. Book an initial call with me via our website here.

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